As you were? Europe deflation fears despite upbeat data

Higher-than-expected inflation data from the euro zone on Friday did little to dispel fears of deflation, with some analysts still expecting the European Central Bank (ECB) to introduce new policy measures.

The consumer price index for the euro zone picked up in November, just beating market expectations, but remained significantly below the 2 percent target set by the ECB.

The annual rate of inflation rose to 0.9 percent in November, from 0.7 percent in October, according to flash estimates from the European Union's statistics agency Eurostat on Friday. The euro held steady against the dollar after the news, trading at around 1.3602.

Meanwhile, separate data revealed that unemployment in the region fell to 12.1 percent in October, from its record high of 12.2 percent in September.

Jonathan Loynes, chief European economist at Capital Economics, warned that Friday's inflation data did not change the bigger picture, and deflation risks remain.

"The latest news on euro-zone inflation and unemployment won't do much to relieve the pressure on the ECB to take more action to support the fragile recovery and head off a potentially damaging bout of deflation," he said in a research note on Friday.

"What's more, there are good reasons to expect it to fall further, including weak pipeline pressures, copious amounts of spare capacity and the strong euro."

As a result, the central bank cuts its main interest rate to 0.25 percent from 0.50 percent at its November meeting. Some analysts now believe the central bank could opt for more stimulatory measures when its Governing Council meets in Frankfurt next Thursday.

Mario Draghi has also stated that LTROs (long-term refinancing operations) - a process by which the ECB provides liquidity to euro zone banks - were another option.

And he has stated that the main refinancing rate - the interest rate that banks have to pay when borrowing money from the ECB - is yet to reach zero despite the recent cut and could be pushed lower.

"We have a whole range of instruments that we can still activate before reaching the lower bounds," Draghi reiterated at an ECB press conference in early November.

Howard Archer, an economist at IHS Global Insight, said the ECB would probably hold fire on taking any further action at its policy meeting next week given that it only cut its refinancing rate in early November.

"However, we expect the ECB will take further action before long, most likely in the form of another Long-Term Refinancing Operation (LTRO) especially given latest data showing a further and deeper fall in bank lending to businesses in October," he said in a research note Friday.